Kentucky does not provide the most congenial legal environment for new or expanding health care providers. Witness the breadth of its certificate of need statutes, the limiting standards in its State Health Plan, and the CON moratoriums its Governors announce from time to time. Witness the malpractice insurance situation.

Now Kentucky, like many other states, faces serious budget shortfalls. Governor Patton has proposed raising the tax on cigarettes, and restructuring two of Kentucky's principal taxes on business entities. These proposals have not yet been sculpted into a Bill, and it is doubtful the General Assembly will enact them as proposed. But readers of Medical News should follow them closely as portents of possible things to come.

Governor Patton proposes to increase the rate of the corporation license tax from $2.1 to $3.8 per $1,000 of "capital employed" in Kentucky - a rate increase of over 80%. Taxable corporations, take a look at your last license tax return and do the math.

The Governor proposes eliminating the corporate income tax and replacing it with a "business activities tax" assessed at 1/10 of one percent of Kentucky revenue and 55/100 of one percent of Kentucky payroll. S corporations and entities classified as partnerships, such as most professional limited liability companies, would be subject to the new tax at the entity level - they are not now subject to the Kentucky income tax - but their individual owners would get a credit against their individual income tax liabilities. The details of this will be devilish.

The Governor has said he will try to exclude professional services from the new business activities tax. It will be interesting to see how physician owned ancillary services are treated. Is it enough to be a professional service corporation or a professional LLC ?

Start up entities with multistate options which would be subject to the new business activities tax may find Kentucky has lost much of whatever allure it once had. Why go through years of paying the new tax on revenues and payroll when, as a start up, you have no profit in the initial years?

Governor Patton has said these changes are necessary because business entities are not paying their fair share of the general tax burden. He was quoted in Louisville's Courier-Journal as saying that the current corporation income tax and license tax systems are so faulty that "[a]nybody that's paying corporate taxes in Kentucky today has got a bad accountant." Kentucky's CPAs ought to weigh in on that one. The Governor has said that Kentucky corporations are zeroing out their Kentucky taxable income by paying fees and royalties to out of state affiliates, but Kentucky law allows the Revenue Cabinet to eliminate any less than arm's length payments to affiliates. The Governor should also note that many of the owners of pass through entities pay taxes on the entities' taxable income flowing through to them which do not show up on the graphs and charts the Governor has used to advocate his plan.

Indiana and Ohio have their own budget issues to face. At the end of the day, we'll see whether taxation has been added to certificate of need and malpractice insurance as issue areas where Kentucky needs real reform, not new burdens on business, to remain competitive.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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